There's new game being played in the world of corporate acquisitions.
It's called strategy that lets the shareholders play a major role.
The credit for designing the strategy goes to the Hunt brothers of Texas, the oil millionaires who are old hands at garnering headlines with their flamboyant acquisitions and trading tactics. Herbert L. Hunt and his brother, Nelson "Bunker," control the Great Western United Corp., which operates a major sugar refining division, a chain of pizza restaurants and develops oil and gas properties.
The Hunts, major players in the world's commodity markets, especially soybeans, sugar and silver, want control of Sunshine Mining Co., of Kellogg, Idaho. Sunshine is the nation's largest silver mining operation.
Frustrated in the goal by Sunshine's stubborn management, the Hunts have twice reduced the Great Western offer for 2 million shares of Sunshine - a controlling interest from $16.75 to $14.75.
The first cut in the Hunt's bid this spring won an admiring glance from Anderson Clayton & Co., the Houston based conglomerate which is also a dominate force in food processing and commodity markets.
Anderson Clayton has been unsuccessful in wooing the management of Gerber Products Co. of Michigan, whose 8.1 million outstanding shares Anderson Clayton is seeking.
So, on Aug. 1, Anderson Clayton cut its original offer of $40 a share to $37 a share, hoping to anger enough Gerber shareholders that lawsuits would be filled against Gerber management for the lost chance to sell the shares at $40.
Anderson Clayton cited the lower third quarter earnings of Gerber as a reason for its reduced bid, but stock market analysts and corporate lawyers say it was a simple - but effective - ploy to pressure management to accept the takeover. Two class action shareholder suits have been filed since the reduction, fulfilling Anderson Clayton's expectations.
Great Western blamed "the substantail expense of litigation and other costs" involved in its six-month-long courtship of Sunshine as the reason for its cutback of the offer. No shareholders have filed suit against Sunshine yet, but Sunshine's management said Wednesday that the completion of the acquisition was the fault of Great Western, not of its board.
Acquisitions experts in a half dozen New York law firms say the reduction of a bid is a dramatic strategy that may well put an end to the classic defenses of takeover targets. The primary defenses are that the offer - no matter how high it might be - is inadequate and that the acquisition would violate the federal antitrust laws.
Many companies have made unusual eleventh hour purchases of concerns engaged in the same field as the company attempting the takeover in order to use the latter defense. One company trying to fend off a foreign firm's overtures purchased a radio station because foreign interests are not permitted to control U.S. broadcasting licenses.
"A director has a fiduciary duty to the shareholders," explained John Hunt Jr. of Cravath Swaine & Moore. "He isn't supposed to worry about losing his job in a takeover. A good offer is supposed to be accepted by a responsible fiduciary if it will be advantageous to the public shareholders."
Some scattered shareholder actions against corporate directors have filed in the past in an attempt to force management to accept a tempting acquisitions bid, especially when the offer was at an unusual premium to the market value of the stock.
But the reduction of a bid a red flag to a shareholder that he's been done out of a profit, is expected to trigger avalanches of suits that would not have been filed otherwise.
In the two weeks since the Gerber bid was slashed, two class action shareholder suits have been filed seeking damages for the lost benefit and attempting to force the acquisition. One suit seeks the difference between the original bid and the second bid - on a $3 a share. The second wants the difference between the first bid and the market value of the stock on the day of the original offer - $3 a share. Those are hefty damages faced by the Gerber directors. With 8.1 million shares outstanding, the specific damages sought in the first case total $24.3 million, while they reach $64.8 million in the second. Punitive damages and legal cases that will be suit will run million of dollars more.
"A lot of people are very unhappy with corporate managements' reactions to take-overs which tend to be purely 'saving our own ass.'" Hunt said, "I think for the immediate future a lot of directors - especially outside directors who don't want to be liable for a shareholder suit - this will have the pressure effect of making them more amenable to takeover offers."
Don Schwartz who teaches corporate laws at Georgetown University Law School, agreed.
It's a very dramatic way of applying pressure on management to accept and offer," Schwartz said. But he cautioned that takeover situations are complex and management is not always wrong in rejecting an overture.
"It doesn't necessarily follow that management is liable for damages because a shareholder lost an opportunity to sell at the highest price offered," he said. "If management can prove that they had a good reason for doing what they did, they may win."
But he conceded, the new lawsuits place a hefty burden on management to prove that they made the correct decision. "It won't be easy," Schwartz said.
Schwartz said that he uses the following examples in his classes to point up the issues for his students: "Suppose the government of Kuwait made a bid for Manischewitz or the mafia made a bit for a company?
"Management has a duty to see that the company remains healthy and is well - run after the takeover," he said. "They must be concerned not only that the public shareholders are well taken care of and have the opportunity to sell their stock at a good price but if crooks want to buy the company, they have the duty to see that they don't get it."
Schwartz pointed out that the entire nation has a concern in the management of American Telephone & Telegraph, for example, not just the shareholders.
"Communities are concerned with the control of their local utility, for example. The impace on society as a whole, the employees, lots of people in addition to the shareholders may be affected by the transfer of ownership and management of a company," he explained. "It's the directors' duty to do well by all of them."
Hunt stressed that the majority of shareholder suits do not come before a court, but are settled well beyond that point.
"The issues may not be litigated, may never be settled clearly by a court," he said. "The pressure effect is monumental, however."